Should I invest in S&P 500 or Dow?
The Bottom Line. While both the DJIA and S&P 500 are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it is based on a larger sample of total U.S. stocks.
The S&P 500 is considered a better reflection of the overall stock market's performance (all sectors) compared to the Nasdaq Composite and the Dow. However, the downside to including more sectors is volatility. Thus, the S&P 500 tends to be more volatile than the Dow.
Total stock market index funds are only slightly more diversified than S&P 500 index funds. Since both types of indexes are heavily weighted toward large-cap stocks, the performance of the two funds is highly correlated (similar).
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky than purchasing individual stocks directly. Because S&P 500 index funds or ETFs track the performance of the S&P 500, when that index does well, your investment will, too. (The opposite is also true, of course.)
The DJIA has historically been associated with significant equities from the retail investor's point of view. Institutional investors perceive the S&P 500 as being more representative of U.S. equity markets because it includes more stocks across all sectors: 500 versus the Dow's 30.
DIA is more expensive with a Total Expense Ratio (TER) of 0.16%, versus 0.0945% for SPY. DIA is up 10.25% year-to-date (YTD) with +$372M in YTD flows. SPY performs better with 18.64% YTD performance, and -$21.16B in YTD flows.
In general, the benefits of investing in the Dow Jones Industrial Average outweigh the disadvantages. Consistent long-term returns: the Dow Jones has a long history of strong performance, with an average annual return of around 10% since its inception in 1896.
The greater a portfolio's exposure to the S&P 500 index, the more the ups and downs of that index will affect its balance. That is why experts generally recommend a 60/40 split between stocks and bonds. That may be extended to 70/30 or even 80/20 if an investor's time horizon allows for more risk.
Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance. Everybody tries to beat it, but few succeed.
| Index fund | Minimum investment | Expense ratio |
|---|---|---|
| Schwab S&P 500 Index Fund (SWPPX) | No minimum. | 0.02%. |
| Fidelity Zero Large Cap Index (FNILX) | No minimum. | 0.0%. |
| Fidelity 500 Index Fund (FXAIX) | No minimum. | 0.015%. |
| T. Rowe Price Equity Index 500 Fund (PREIX) | $2,500. | 0.19%. |
What if I invested $1000 in S&P 500 10 years ago?
So imagine you put $1,000 into either fund 10 years ago. You'd be up to roughly $3,282 with VOO or $3,302 from SPY.
Craziest thing I learned recently: $10,000 invested in the S&P 500 in 1980 would be worth over $1M today.
The Bottom Line
While both the DJIA and S&P 500 are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it is based on a larger sample of total U.S. stocks.
So, if you are looking to own a more diversified basket of stocks, the S&P 500 will be the right fit for you. However, those who are comfortable with the slightly higher risk for the extra returns that investing in Nasdaq 100 based fund might generate will be better off with Nasdaq 100.
You can't directly invest in the index itself, but you can buy individual stocks of S&P 500 companies, or buy a S&P 500 index fund through a mutual fund or ETF. The latter is ideal for beginner investors since they provide broad market exposure and diversification at a low cost.
Also, research suggests that when it comes to the S&P 500's historical returns, there's never been a bad time to buy as long as you're a long-term investor. Analysts at Crestmont Research examined the index's rolling 20-year total returns and found that every single one of those periods ended in positive gains.
VOO earns a top rating of Gold, while SPY earns the next best rating of Silver. Almahasneh says the reason is fees and inefficiencies of the unit investment trust structure. The differences may be minimal, but there's no reason to leave change on the table. VOO charges 0.03%, while SPY charges 0.09%.
| Fund Name (Ticker) | Expense Ratio | Annualized 5-Year Return |
|---|---|---|
| SPDR Dow Jones Industrial Average ETF Trust (DIA) | 0.16% | 10.16% |
| iShares Dow Jones U.S. ETF (IYY) | 0.20% | 14.20% |
| Invesco Dow Jones Industrial Average Dividend ETF (DJD) | 0.07% | 8.67% |
Here's Where Pros See Stocks Headed Next. It took seven years for the Dow Jones Industrial Average to move from 20,000 to 40,000, and it had to bounce back from an April slump to cross the finish line. The 30-component blue-chip index now joins the Nasdaq and the S&P 500 in making recent highs.
What is the 20 year average return on the Dow Jones?
| Period | Average annualised return | Total return |
|---|---|---|
| Last year | 19.3% | 19.3% |
| Last 5 years | 11.7% | 74.0% |
| Last 10 years | 14.4% | 282.3% |
| Last 20 years | 10.4% | 627.2% |
On April 12, 1994, the Dow Jones Industrial Average closed at 3,681.69. Over the trailing-30-year period, this widely followed index has increased at an annualized rate of 8.09%! If this superior rate of gains were to persist, the Dow could reach 50,000 before the calendar changes to 2028.
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.
Data source: Author's calculations. As you can see from the chart, investing $5,000 annually in the S&P 500 would make you a millionaire in a little over 30 years, assuming average 10.25% annual returns.
